Tuesday, October 7, 2008

Bah Humbug: Both Parties Are Guilty With Respect to the Economy, But Neither Offers Concrete Solutions

The poor state of the U.S. economy will undoubtedly impact this year’s presidential election. Although political scientists quibble about the exact impact of the economy on presidential elections, most agree that some connection exists and that voters typically punish the incumbent or the incumbent’s party for a bad economy. Current polls show that voters’ fears of worsening economic conditions have indeed benefitted Senator Barack Obama and harmed Senator John McCain. After the Republican National Convention McCain took the lead in most reputable polls like Gallup and Rasmussen. But voters shifted dramatically to Obama following days of triple-digit losses on the Dow Jones Industrial Average, the demise of Lehman Brothers, the federal bail-out of AIG, Fannie Mae and Freddie Mac, debate over the $700 billion bail-out package, and rising unemployment. Although other issues probably contribute to Obama’s recent surge in the polls (e.g., Palin’s foibles), opinion polls confirm that a majority of voters blame Republicans more than Democrats for the country’s recent economic troubles.

The relationship between the economy and presidential elections probably relies upon voters exaggerating the significance of presidents in shaping economic activity. While presidents certainly can and do influence macroeconomic conditions, there are so many other factors – both domestic and international – that overshadow a president’s role, but which voters and commentators tend to ignore.

First, there is Congress. The U.S. Constitution gives Congress, not the President, the power to spend and tax. Thus, every dollar of spending allocated from the national treasury requires congressional approval. Also, only Congress can formulate tax policy – including any tax cuts or increases. So, while the president has a great role in shaping the budget, Congress has the ultimate constitutional authority on spending. Accordingly, if the economic downturn results from exorbitant spending and tax cuts during the last eight years, then Congress must share equal if not greater responsibility for the situation than President Bush.

Democrats argue that Republicans have controlled the White House and Congress for the last eight years and that they are fully responsible for the economy. Well, this is simply untrue. Democrats controlled the Senate from June 2001 to January 2003 after Senator Jim Jeffords of Vermont resigned from the Republican party and became a Democratic-voting Independent. That’s why Tom Daschle was Senate Majority Leader for a bit of time. Also, the Democrats have controlled both the House and Senate from 2007 until the present. Outside of the war funding vote (which was really about the war – not money), I have not heard of any systematic effort by the Democrats to reign in government spending during their time as the majority party.

Furthermore, the notion of either party "controlling" Congress in the last eight years is a bit of a stretch, given the closely divided political affiliation of its members. The Senate, for example, presently has 50 Democrats, 49 Republicans, and 1 independent (Lieberman). No party has a majority in the Senate. While the Democrats have a slight majority of 53% in the House of Representatives, the House, like the Senate, has been closely divided throughout Bush’s terms in office. The fact that no party dominates Congress simply mirrors the closely divided state of national politics.

With respect to the credit crisis, most economists locate fault with consumers, banks, and Wall Street – not the president. Indeed, FactCheck.Org, a nonpartisan organization that helps dissect misleading political discourse, has collected the most persuasive and leading arguments among economists that explain the financial market collapse (I have discussed these elsewhere on this blog). Low interest rates, risky lending, securitization of risky mortgages, and consumers overextending themselves to purchase homes and drawing down appreciation – all combined to create this debacle.

Both Obama and McCain keep sparring over some vague notion of "deregulation," when that really had nothing to do with the present state of affairs. If anything, both parties would share responsibility for deregulation because it was accomplished over decades during which Democrats had some control of Congress – and even the White House.

Despite the exaggerated idea of the president’s control over the economy, voters can lay blame on Bush and the Republican Congress for one thing: the soaring budget deficit. Although Clinton’s presidency produced budget surpluses, Bush cut taxes and increased spending, which led, naturally, to deficits. Bush argued that his tax cuts would stimulate economic activity and lead to greater tax revenue, but economic date refutes this argument. In the long run, the Bush tax cuts and increased spending have caused budget deficits, which increases the public debt and the burden on taxpayers. The spiraling public debt also makes it difficult for the national government to implement costly but socially desired programs such as health care reform. For this piece of the puzzle, voters should blame Bush – and Congress. But this is simply one factor shaping the economy, and the deficit does not explain the financial meltdown or the need for the bailout.

Finally, President Bush and/or the Republicans are seen as responsible for sending jobs to foreign countries. NAFTA and other trade pacts are the primary culprits in this argument. Many economists, however, resist blaming NAFTA. Robert Reich, Clinton’s Secretary of Labor and an Obama advisor, for example, argues that jobs left the "rust belt" due to automation and, later, due to the location of labor in China (which has nothing to do with NAFTA). He also says that Democrats should not blast "free trade." Also, to the extent that free trade can explain the evaporation of solid jobs in the U.S., then both Democrats and Republicans share responsibility. President Clinton endorsed and argued for the passage of NAFTA. And while Obama lambasted Clinton for "supporting" NAFTA during primaries in Ohio and Pennsylvania, Joe Biden, his running mate, voted for it. Furthermore, Obama promised not to seek the repeal of NAFTA, arguing that this would actually cost U.S. workers jobs. Instead he promised to "renegotiate" its terms. It is unclear what this means in terms of U.S. jobs. Also, since his time in Congress, Obama has also voted for a trade pact.

The candidates are making a lot of lofty promises about what they will do with the economy, and frankly, I doubt that either will make a big dent. Credit is extremely difficult for consumers and businesses to obtain, and this will lead a sustained slowdown in economic activity. The federal reserve has much more influence over credit markets than the president. Also, neither candidate has offered any concrete regulatory solution for preventing the corporate and consumer behavior responsible for causing the financial meltdown. In addition, it is unclear whether either candidate can actually balance the budget. McCain’s commitment to keeping Bush’s upper-income and corporate tax cuts (some of which were already sneaked into the bailout legislation) will likely result in a deficit, and many experts are unconvinced that Obama can actually accomplish many of his social policy goals, such as health care – and cut taxes for most American families, as his campaign promises. Basically, both parties are offering very grand and ambiguous statements about how they will revitalize the economy. For me, details matter much more than catchy slogans, and so far, I am unimpressed.

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